Mike Lipper’s Monday Morning Musings
Headlines Excite, Dictate, or Respond, not Inform
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
As has been previously expressed, investment markets have entered an emotional trading phase. The combination of a US election, COVID-19, a new justice for the Supreme Court, and military accidents, primes the next four months for active trading and makes it inhospitable for long-term investing.
Even when the source is a generally respected, media headlines can be misleading. The wording of headlines is often not the choice or responsibility of the author or the assignment editor, but of a very busy headline editor quick to read, but not as familiar with the topic as others. Each person that touches an element of the news views it through the lens of their own biases. In the current emotional period it is not unusual to see political bias in each of the news elements, including the headlines. This misdirects the audience and raises questions regarding the utility of the news elements.
In The Wall Street Journal weekend edition there is a headline “Stocks Fall for Third Straight Week”, which makes it sound like we’ve entered a bear market. (That could please some reporters/editors who have different political views than the higher priced Editorial Board Members representing the official view of the publication.) When one reads the headline, the initial reaction is to expect a meaningful weekly decline, probably double digits. Nowhere in the article is it mentioned that the Dow Jones Industrial Average declined -0.03% for the week, or that the market went up three days during the week. The article neglected to mention something that is probably more bearish, that the Friday decline had a materially larger volume of shares traded. This may be the reason investors need professional analysts to review current market conditions.
One Day Difference, Distinctly Different Conclusions
Regular readers know that my first lens on the market is through the actions of the mutual fund professionals. Historically I have relied on fund performance for the five trading days ended Thursday. I do this for two reasons:
- I used to hire good people from the “back offices” of fund groups and their custodians, where I learned of the natural pressure to quickly finish computations before leaving for the weekend on Friday. Consequently, the Friday calculations were generally not of the same quality as Thursday.
- In addition, when stock specialists set transaction prices there is a natural tendency to reduce capital exposures over the weekend.
For the week ended Thursday, US Diversified Equity Funds (weighted by performance) averaged a gain of +0.98%. However, that is not the full story. Of the eighteen included investment objectives, only one was down for the week, Large-Cap Growth Funds -0.13%. The performance of these Large-Cap Growth portfolios has been dominated by well-known tech companies. To understand the impact of the media’s focus, look at the year to date numbers, where the US Diversified Equity macro group gained +4.71%. Performance was driven by the Large-Cap Growth Fund average return of +20.24%. However, that was not the critical number in understanding the impact of the markets, where the median fund was down -3.18%. (The median is the midpoint of the performance array.) This is significant because if one adds up all the money invested in Large Cap Growth funds plus the money invested in S&P 500 Index funds, it represents only 36.9% of the money invested in the US Diversified Equity group. Thus, it is of interest, but is not a full measure of the performance of the market. The extraordinary gain from the March bottom is not so large that a major overall correction is warranted, a view contrary to one you’d get from reading financial columns this weekend. Another thing not credited is the downward selling pressure exerted on some of the best performing stocks in order to fund the purchase of 17 IPOs which began trading thus week.
A Very Bullish View
A large US brokerage firm believes the initial impact of the Coronavirus began a new market cycle, with profit margins expanding into 2021. They could be correct in the absence of any new negatives appearing, although my own view is that they could be a year early.
Portfolio Management Views
- At some point in long-term portfolios there is a danger that every single position does well. This is dangerous because when the inevitable market decline happens, almost all the positions are likely to decline. Some late blooming positions are a sign of a prudent manager who wants to own something going up in almost all market conditions.
- By far the largest surprise in many portfolios is my belief that we are not in a permanent low interest rate environment. Since few people are looking for an explosion of interest rates, I am of the belief that good things don’t last forever.
What surprises are on your worktable?
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